RBI's Economic Capital Framework: Some suggestions
RBI’s Economic Capital Framework (ECF)*
Some suggestions for the Panel to consider
This refers to the
report “Bimal Jalan to head expert panel on Economic Capital Framework”
(Business Line, December 8). It is heartening to find that RBI has shown the magnanimity and chosen
to include both Jalan and Rakesh Mohan in the Economic Capital Framework (ECF)
Panel, putting to rest the speculations in the media about differences of views
between GOI and RBI as to who should man the panel.
The terms of reference
given to the Panel are broad enough to cover various aspects of the controversy
about the capital framework of RBI which became almost a spar between two
schools of thought on the holding of reserves by India’s central bank.
Here three or four
aspects deserve the Panel’s attention. They are:
a) RBI’s share capital has
remained static at Rs 5 crore since inception (1935). Is there a case for
raising this to a decent level, say, the equivalent of US $ 500 billion or
upwards? If yes, whether this should be done by additional contribution by GOI
or conversion of existing reserves?
b) Whether RBI should
create a ‘Capital Protection Fund’ to insulate its capital from erosion in
value? If so whether the present provisions of RBI Act on ‘provisions’ will
cover creation of such a fund or whether an amendment to the Act is necessary?
c) Is it not prudent accounting practice for RBI
to protect the value of its gold and foreign securities holdings against value
erosion, instead of generating income by taking advantage of rupee depreciation?
Actually the fallacious argument in Economic Survey, 2016-17 about ‘surplus
reserves’ emanated from certain wrong notions about RBI’s accounting practices in
regard to revaluation of non-rupee assets (gold, forex securities etc) which
were promptly clarified by the then RBI Governor Raghuram Rajan and the ES
suggestion was not pursued. Dr Rajan did give more elucidations on the subject
in his Delhi speech on September 3, 2016.
Hopefully,
all these and more will get clarified when the expert panel on ECF submits its
report.
M G Warrier, Thiruvananthapuram
*Business Standard published a slightly edited version of this letter on December 28, 2018
Comments